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on Dynamic General Equilibrium |
| By: | Le, Vo Phuong Mai (Cardiff Business School); Meenagh, David (Cardiff Business School); Minford, Patrick (Cardiff Business School); Wang, Ziqing (Sheffield Hallam University, Sheffield, United Kingdom) |
| Abstract: | This paper explores the economic impacts of the Bank of England’s quantitative easing policy, implemented as a response to the global financial crisis. Using an open economy Dynamic Stochastic General Equilibrium (DSGE) model, we demonstrate that monetary policy can remain effective even when nominal interest rates have reached the zero lower bound. We estimate and test the model using the indirect inference method, and our simulations indicate that a nominal GDP targeting rule implemented through money supply could be the most effective monetary policy regime. Additionally, our analysis suggests that a robust, active fiscal policy regime with nominal GDP targeting could significantly enhance economic stabilization efforts. |
| Keywords: | Quantitative easing, Financial friction, SOE-DSGE, Indirect inference, Zero bound |
| JEL: | E44 E52 E58 C51 |
| Date: | 2023–04 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2023/9&r=dge |
| By: | Le, Vo Phuong Mai (Cardiff Business School); Meenagh, David (Cardiff Business School); Minford, Patrick (Cardiff Business School) |
| Abstract: | Developed economies have experienced slower growth since the 2008 Önancial crisis, creating fears of "secular stagnation." Rational expectations models have forward-looking bubble solutions, which could cause this; here we investigate the case of Japan. We show that a New Keynesian model with a weak equilibrium growth path driven by pessimism sunspot belief shocks matches economic behaviour. Another possibility is a conventional model where productivity growth has simply slowed down for unknown reasons. Nevertheless, a welfare-optimising approach implies Öscal policy should commit to eliminating the potential sunspot while being prepared to revert to normal policy if ináation rises. |
| Keywords: | Secular stagnation; Pessimism sunspot; Indirect Inference; DSGE model |
| JEL: | E5 E6 E32 |
| Date: | 2023–05 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2023/13&r=dge |
| By: | Tommaso Gasparini |
| Abstract: | Uncertainty shocks play a crucial role in driving business cycle fluctuations. This paper investigates the impact of changes in banking competition on the propagation of uncertainty shocks. Using a panel dataset of 44 countries, I show that lower banking competition amplifies the negative impact of uncertainty on output growth. I further explore this relationship through a dynamic stochastic general equilibrium model featuring imperfect banking competition and financial frictions. The model shows that lower banking competition leads to higher borrowing rates and increased risk-taking by entrepreneurs. As a result, when the number of competitors is lower, uncertainty shocks have a stronger negative impact on defaults, investment and output due to increased risk-taking. |
| Keywords: | Financial Frictions, Financial Intermediaries, Heterogeneous Agents, Market Power, Uncertainty |
| JEL: | E32 E44 G21 L13 |
| Date: | 2023–04 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2023_416&r=dge |
| By: | Joseph Abadi; Markus K. Brunnermeier; Yann Koby |
| Abstract: | The reversal interest rate is the rate at which accommodative monetary policy reverses and becomes contractionary for lending. We theoretically demonstrate its existence in a macroeconomic model featuring imperfectly competitive banks that face financial frictions. When interest rates are cut too low, further monetary stimulus cuts into banks’ profit margins, depressing their net worth and curtailing their credit supply. Similarly, when interest rates are low for too long, the persistent drag on bank profitability eventually outweighs banks’ initial capital gains, also stifling credit supply. We quantify the importance of this mechanism within a calibrated New Keynesian model. |
| Keywords: | Monetary Policy; Lower Bound; Negative Rates; Banking |
| JEL: | E43 E44 E52 G21 |
| Date: | 2022–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:94694&r=dge |
| By: | Michael Elsby; Axel Gottfries; Ryan Michaels; David Ratner |
| Abstract: | Replacement hiring—recruitment that seeks to replace positions vacated by workers who quit—plays a central role in establishment dynamics. We document this phenomenon using rich microdata on U.S. establishments, which frequently report no net change in their employment, often for years at a time, despite facing substantial gross turnover in the form of quits. We devise a tractable model in which replacement hiring is driven by a novel structure of frictions, combining firm dynamics, on-the-job search, and investments into job creation that are sunk at the point of replacement. A key implication is the emergence of vacancy chains. Quantitatively, the model reconciles the incidence of replacement hiring with the large dispersion of labor productivity across establishments, and largely replicates the empirical volatility and persistence of job creation and, thereby, unemployment. |
| Keywords: | Quits; replacement hiring; unemployment; vacancies; business cycles |
| JEL: | E32 J63 J64 J60 |
| Date: | 2022–08–19 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:94661&r=dge |
| By: | Michael B. Devereux; Charles Engel; Steve Pak Yeung Wu |
| Abstract: | We construct a two-country New Keynesian model in which US government debt has an advantage as a superior collateral asset in the balance sheets of banks. The model can account for the observed response of the US dollar and US bond returns to a global downturn, in particular when the downturn is associated with a global financial crisis. In our model, the U.S. enjoys an “exorbitant privilege” as its government bonds are desired by banks both in the U.S. and abroad as superior collateral. In times of global stress, the dollar appreciates and the “convenience yield” earned by U.S. government bonds increases. There is “retrenchment” - each country reduces its holdings of foreign assets - a critical determinant of which is the endogenous response of prices and returns. In addition, the model displays a U.S. real exchange rate appreciation despite that domestic absorption in the US falls relative to the rest of the world during a global downturn, thus addressing the “reserve currency paradox” highlighted by Maggiori (2017). |
| JEL: | F30 F40 G15 |
| Date: | 2023–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31164&r=dge |
| By: | Wenli Li; Costas Meghir; Florian Oswald |
| Abstract: | We specify and estimate a lifecycle model of consumption, housing demand and labor supply in an environment where individuals may file for bankruptcy or default on their mortgage. Uncertainty in the model is driven by house price shocks, education specific productivity shocks, and catastrophic consumption events, while bankruptcy is governed by the basic institutional framework in the U.S. as implied by Chapter 7 and Chapter 13. The model is estimated using micro data on credit reports and mortgages combined with data from the American Community Survey. We use the model to understand the relative importance of the two chapters (7 and 13) for each of our two education groups that differ in both preferences and wage profiles. We also provide an evaluation of the BAPCPA reform. Our paper demonstrates importance of distributional effects of Bankruptcy policy. |
| Keywords: | Lifecycle; Bankruptcy; Housing; Mortgage Default; Labor Supply; Consumption; Education; Insurance; Moral hazard. |
| JEL: | G33 K35 J22 J31 D14 D18 D52 D53 E21 |
| Date: | 2022–08–30 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:94692&r=dge |
| By: | Francisco J. Ruge-Murcia; Alexander L. Wolman |
| Abstract: | Inflation is determined by interaction between real factors and monetary policy. Among the most important real factors are shocks to the supply and demand for different components of the consumption basket. We use an estimated multi-sector New Keynesian model to decompose the behavior of U.S. inflation into contributions from sectoral (or "relative price") shocks, monetary policy shocks, and aggregate real shocks. The model is estimated by maximum likelihood with U.S. data for the post-1994 period in which inflation and the monetary policy regime appeared to be stable. In addition to providing a broad decomposition of inflation behavior, we enlist the model to help us understand the inflation shortfall from 2012 to 2019, and the dramatic inflation movements during the COVID pandemic. |
| Keywords: | Monetary Policy; sectoral shocks; inflation shortfall; COVID-19 |
| JEL: | E31 E52 E58 |
| Date: | 2022–05 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:94408&r=dge |
| By: | Gálvez, Julio; Paz-Pardo, Gonzalo |
| Abstract: | Households face earnings risk which is non-normal and varies by age and over the income distribution. We show that allowing for these rich features of earnings dynamics, in the context of a structurally estimated life-cycle portfolio choice model, helps to rationalize the limited participation of households in the stock market and their low holdings of risky assets. Because households are subject to more background risk than previously considered, the estimated model implies a substantially lower coefficient of risk aversion. We also find renewed support for rule-of-thumb investment strategies under the model with the nonlinear earnings process. JEL Classification: G11, G12, D14, D91, J24, H06 |
| Keywords: | earnings risk, household finance, simulated method of moments, stock ownership, wealth accumulation |
| Date: | 2023–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20232810&r=dge |
| By: | Marek Ignaszak; Philip Jung; Keith Kuester |
| Abstract: | Consider a union of atomistic member states. Idiosyncratic business-cycle shocks cause persistent differences in unemployment. Private cross-border risk-sharing is limited. A federal unemployment-based reinsurance scheme can provide transfers to member states in recession, which helps stabilize local unemployment. Limits to federal generosity arise because member states control local labor-market policies. Calibrating the economy to a stylized European Monetary Union, we find that moral hazard puts notable constraints on the effectiveness of federal reinsurance. This is so even if payouts are indexed to member state’s usual unemployment rate or if the federal level pays only in severe-enough recessions. |
| Keywords: | Unemployment reinsurance, fiscal risk sharing, labor-market policy, fiscal federalism, search and matching |
| JEL: | E32 E24 E62 H77 |
| Date: | 2023–04 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2023_419&r=dge |
| By: | Marco Bassetto; Wei Cui |
| Abstract: | The return on government debt is lower than that of asset with similar payoffs. We study optimal debt management and taxation when the government cannot directly redistribute towards the agents in need of liquidity but otherwise has access to a complete set of linear tax instruments. Optimal government debt provision calls for gradually closing the wedge between the returns as much as possible, but tax policy may work as a countervailing force: as long as financial frictions bind, it can be optimal to tax capital even if this magnifies the discrepancy in returns. |
| Keywords: | Capital tax; Financing constraints; Asset liquidity; Optimal level of government debt; Low interest rates |
| JEL: | E22 E62 E44 |
| Date: | 2023–02–28 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:95726&r=dge |
| By: | Medina, Juan Pablo; Toni, Emiliano; Valdes, Rodrigo |
| Abstract: | There is consensus that Chile has made substantial progress in its macroeconomic policies during the last 30 years. However, there is no comprehensive and formal quantification of the macroeconomic stabilization gains in terms of the critical dimensions in the conduct of monetary and fiscal policies. In this work, we make an effort to quantify these gains using a structural model that incorporates essential features of the Chilean economy, disentangling the role of changes in policies and shocks in shaping the business cycles. We pay particular attention to two simultaneous and significant policy regime changes. In 2000, Chile moved from a managed exchange rate regime to a floating one coupled with flexible inflation targeting. On fiscal, policy shifted to a more countercyclical budget, changing a the-facto nominal target for a structural one. Policies also deviated from their implicit rules in the old and the new regimes—the ``art" policy component. Fitting the model to the Chilean data through Bayesian techniques in the period 1990-2015, we find that a flexible exchange rate regime and a countercyclical fiscal rule enhance each other in terms of lowering macroeconomic volatility, especially those arising from commodity prices and other critical economic shocks. Together, the monetary and budgetary reforms attenuated both GDP and inflation's volatility considerably in 2000-2015 (compared to the counterfactual based on the 90's policies). The art part also contributed substantially to lowering macro volatility, especially fiscal policy deviations on GDP volatility. For the 90s, the counterfactuals using the new policy framework also show lower volatility and an even more relevant role for policy deviations. |
| Keywords: | DSGE Model, Fiscal and Monetary Policies, Macroeconomic stabilization, Chile. |
| JEL: | C54 E32 E37 E52 E62 F41 |
| Date: | 2023–04–28 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:117198&r=dge |
| By: | Hirokuni Iiboshi; Daikuke Ozaki; Yui Yoshii |
| Abstract: | This study examines the impact of the time and financial costs of parenting on the lifespan of married couples to explore the origins of the child penalty. Using Japanese aggregate data from the "Basic Survey of Social Life, " which includes a sample of over two hundred thousand Japanese people, the study extends the family model introduced by Blundell et al.(2018) to a life cycle model of heterogeneous married couples with idiosyncratic labor productivity shocks. We then quantitatively analyze the time allocation preferences, including child care. After fitting the model's calculated values to the data, we conduct policy simulations for married couples based on their educational background. The calculations demonstrate that an increase in assets leads to a decrease in female work hours and an increase in childcare hours. Additionally, a 25 % increase in the income replacement rate for parental leave increases the take-up of parental leave by 20 %, while a permanent 10 % increase in wages increases it by 4%. |
| Date: | 2023–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2304.11531&r=dge |
| By: | Yunfang Hu; Takuma Kunieda; Kazuo Nishimura; Ping Wang |
| Abstract: | We construct a dynamic general equilibrium model of foreign direct investment (FDI) and foreign technology adoption, incorporating adoption barriers, international technology spillover, and relative price advantages. A higher FDI conversion efficacy, a lower adoption barrier, or a stronger international technology spillover, together with a lower relative price of FDI, can propel an economy to exhibit a flying geese paradigm escaping from a middle-income trap and catching up with the world frontier. We calibrate the model to eight representative Asian economies, including Asian Tigers and less-developed countries. Growth accounting exercises show that total factor productivity, FDI conversion efficacy, and foreign technology spillover drive Asian Tigers’ growth miracle, whereas a reduced adoption barrier and a favorable relative price of FDI are more crucial for the growth of less-developed Asian economies. The counterfactual analysis confirms that technology-embodied FDI serves as a flying propeller, explaining almost two-thirds of their economic growth. |
| JEL: | E20 F21 O40 |
| Date: | 2023–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31159&r=dge |
| By: | Maximiliano Dvorkin; Juan M. Sanchez; Horacio Sapriza; Emircan Yurdagul |
| Abstract: | The wave of sovereign defaults in the early 1980s and the string of debt crises in subsequent decades have fostered proposals involving policy interventions in sovereign debt restructurings. The global financial crisis and the recent global pandemic have further reignited this discussion among academics and policymakers. A key question about these policy proposals for debt restructurings that has proved hard to handle is how they influence the behavior of creditors and debtors. We address this challenge by evaluating policy proposals in a quantitative sovereign default model that incorporates two essential features of debt: maturity choice and debt renegotiation in default. We find, first, that a rule that tilts the distribution of creditor losses during restructurings toward holders of long-maturity bonds reduces short-term yield spreads, lowering the probability of a sovereign default by 25 percent. Second, issuing GDP-indexed bonds exclusively during restructurings also reduces the probability of default, especially of defaults in the five years following a debt restructuring. The policies lead to welfare improvements and reductions in haircuts of similar magnitude when implemented separately. When jointly implemented, they reinforce each other's welfare gains, suggesting good complementarity. |
| Keywords: | Crises; GDP-indexed Debt; Distribution of Creditor Losses; Default; Sovereign Debt; Maturity; Restructuring; Country Risk; International Monetary Fun |
| JEL: | F34 F41 G15 |
| Date: | 2022–04–06 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:94347&r=dge |
| By: | Laura Bakkensen; Toan Phan; Russell Wong |
| Abstract: | We theoretically and empirically investigate how climate risks affect collateralized debt markets. First, we develop a debt model where agents have different beliefs over a long-run risk. In contrast with existing two-period competitive-equilibrium models, our infinite-horizon competitive-search model predicts more pessimistic agents are more likely to make leveraged investments on risky collateral assets. They also tend to use longer maturity debt contracts, which are more exposed to the long-run risk. Second, employing large data on real estate and mortgage transactions, combined with high resolution sea-level-rise maps, we find robust evidence for these findings. We also show how monetary and securitization policies affect mortgage climate risk exposure. Our results highlight the importance of heterogeneous beliefs in understanding the effects of climate change on the financial system. |
| Keywords: | climate finance; sea-level rise; heterogeneous beliefs; real estate; mortgage; search and matching; monetary policy |
| Date: | 2023–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:95450&r=dge |
| By: | Adam Blandin; John Bailey Jones; Fang Yang |
| Abstract: | Married men work substantially more hours than men who have never been married, even after controlling for observables. Panel data reveal that much of this gap is attributable to an increase in work in the years leading up to marriage. Two potential explanations for this increase are: (i) men hit by positive labor market shocks are more likely to marry; and (ii) the prospect of marriage increases men's labor supply. We quantify the relative importance of these two channels using a structural life-cycle model of marriage and labor supply. Our calibration implies that marriage substantially increases male labor supply. Counterfactual simulations suggest that if men were unable to marry, prime-age male work hours would fall by 7%, and if marriage rates fell to the extent observed, men born around 1980 would work 2% fewer hours than men born around 1960. |
| Keywords: | labor supply; family structure; marriage; marital wage premium |
| JEL: | D15 J1 J22 J31 |
| Date: | 2023–01–13 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:95483&r=dge |
| By: | Pauline Carry (CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - CNRS - Centre National de la Recherche Scientifique, ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | This paper provides new evidence on how firms and workers adjust to a restriction on lowhour jobs. I exploit a unique reform introducing a minimum workweek of 24 hours in France in 2014, affecting 15% of jobs. Drawing on linked employer-employee data and an event study design, I find a firm-level reduction in the number of jobs and an increase in average hours per worker. Overall, total hours worked in the firm decreased significantly, showing imperfect substitutability between workers and hours. The effects differ by gender: part-time female workers were replaced by full-time male workers. Importantly, reduced-form evidence indicates the reallocation of workers from firms highly exposed to the policy to firms less exposed. To quantify the aggregate impact taking into account these effects, I build and estimate a search and matching model with heterogeneous workers and firms. I find that the minimum workweek destroyed 1% of jobs but had no effect on total hours, due to positive general equilibrium effects. Finally, the gender gap in welfare increased by 3% because women were more affected by the direct negative employment effects and benefited less from reallocation effects. |
| Keywords: | Working time regulation, Hours of work, Reallocation effects, Gender inequality |
| Date: | 2022–12–29 |
| URL: | http://d.repec.org/n?u=RePEc:hal:spmain:hal-04067393&r=dge |
| By: | Paul Ho; Pierre-Daniel G. Sarte; Felipe Schwartzman |
| Abstract: | We study how international linkages and nominal price rigidities jointly shape the dynamics of inflation and output across multiple large economies. We describe how these features produce a global system of Phillips curves explicitly connected by multilateral trade relationships. In equilibrium, disturbances abroad propagate to domestic variables not only directly, through pairwise trade between countries, but also indirectly through third-country effects arising from the network structure of trade. The combined propagation mechanisms imply that country-specific shocks alone explain almost 90 percent of the observed average pairwise comovement in output growth between countries. These idiosyncratic shocks also explain more than 1/2 the cross-country comovement in inflation, and between output and inflation. We estimate that a European inflationary shock results in significant U.S. inflation accompanied by lower output, and that these responses transpire almost entirely from the network effects of trade. In addition, a tightening of U.S. monetary policy generates a percentage decline in output globally that is comparable to 1/2 the domestic response. |
| Keywords: | international comovement; multilateral trade; New Keynesian Phillips Curve |
| JEL: | E31 E32 F41 F44 |
| Date: | 2022–11–16 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:95163&r=dge |
| By: | Jesús Fernández-Villaverde; Daniel R. Sanches |
| Abstract: | The gold standard emerged as the international monetary system by the end of the 19th century. We formally study its properties in a micro-founded model and find that the scarcity of the world gold stock not only results in a suboptimal output of goods that are purchased with money but also subjects the domestic economy of a country to external shocks. The creation of inside money in the form of private credit instruments adds to the money supply, usually resulting in a Pareto improvement, but opens the door to the international transmission of banking crises. These properties of the gold standard can explain the limited adherence by peripheral countries because of the potential risks to their economies. We argue that the gold standard can be sustainable at the core but not at the periphery. |
| Keywords: | gold standard; specie flows; non-neutrality of money; inside money |
| JEL: | E42 E58 G21 |
| Date: | 2022–09–21 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:94803&r=dge |